Rathbones' head of multi-asset investments David Coombs has called on star managers to resist distribution pressures placed on them on account of the impact that size can have on performance.
It is an issue that Rathbones' fund selection team historically identified with Tom Dobell, which motivated them to sell out when the M&G Recovery fund was top quartile. Dobell's performance has since struggled and over the past three years it has returned 11.9% versus 31.9% by the UK All Companies sector.
Coombs, who manages the Rathbone Multi Asset Total Return and Strategic Growth funds, says Dobell's underperformance does not suggest that he has become less skilled as a fund manager, but rather the environment in which he was running money changed. He added that he has faith in Dobell's skill and would back the manager if M&G launched an investment trust or capacity constrained fund for him in the future.
'He was generating his alpha from mid and small caps and we knew that from 2008 there was far less liquidity because bank prop desks were withdrawing from the market. We have seen the same thing over the last six weeks, mid caps have really been struggling,' he explained.
As Dobell attracted billions and ended up running a much bigger fund, Coombs noted that Dobell was limited in his ability to hold the stocks where he had historically added value.
'If Tom Dobell launched an investment trust or a new fund tomorrow which was capacity constrained, we would definitely buy it,' he added.
Coombs was keen to stress that Dobell is not alone and this represents a big industry issue.
'The problem is that star managers lose control of the portfolios because the distribution side takes over as the priority and weakens the performance. It is important that those managers that suddenly find themselves "hot" keep control and push back a bit on the distribution side of the business. There should be a healthy conflict between distribution and investment management. What we see for all sorts of reasons is that sometimes the balance just gets slightly awry,' he said.
His sentiments are echoed by Mike Webb, chief executive of Rathbones Unit Trust Management (RUTM), who said more chief executives should take the decision, however difficult, to close funds or limit capacity.
'In today's information age and being able to move information around very quickly, what you find is businesses grow assets very rapidly, unable to manage those to the same extent...If you are a big company or major asset management group you still have to feed the beast.'
Webb added: 'It is a very difficult decision as a chief executive to shut off a fund, a really difficult decision. And it is a very difficult to achieve as we don't have mechanisms that are easy to do that. When you have an open-ended fund, what are the mechanisms? You can slap on an initial charge, take them off all of the platforms. Would it not be easier to say we are closed to new business? Wouldn't that be a wonderful thing.
'I think what you are going to find in future is a greater view from the investment professional as to what they are capable of running in total size and businesses that really care about unitholders will shut capacity.'
He said two things to monitor are the size of the the inflows into a fund, alongside how fast the inflows are into a fund.
'These are two things to watch on the research side and as CEO of RUTM I am definitely watching. We would not hesitate to shut a fund or limit capacity in a fund.'